Cost containment in Medicare and private coverage

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for June 28, 2000

Cost containment in Medicare and private coverage The Health Care Financing Administration (HCFA), the federal agency that administers Medicare and Medicaid, has been a successful leader in cost containment for nearly two decades. From 1970 (a few years after the Medicare program was implemented in 1965) until 1997 (the most recent year for which data are available), the growth in spending per person in Medicare has been slower than in the private health insurance system, where most people under age 65 obtain coverage (see figure below). Moreover, between 1999 and 2008, total spending in Medicare is projected to grow more slowly than in private health insurance, even though the number of people covered by Medicare will grow more rapidly than will enrollments in private insurance.

HCFA’s proven cost-containment methods involve fine tuning payments to doctors, hospitals, and other providers. But in a policy debate where the focus in on lowering the projected 75-year spending shortfall, there is an inherent bias against proposals to simply fine tune the system in favor of radical approaches.

The 75-year projections on which assessments of Medicare’s future are based are fairly imprecise, rough estimates – (see Medicare, Social Security, and 75-year projections). It is difficult to incorporate fine adjustments into these rough estimates and properly measure their impact. On the other hand, large major changes are much more easily added to the projections, and their effects can be more easily measured. Disruptive changes in the Medicare program – like instituting vouchers or raising the eligibility age – may easily show large reductions in projected expenditures, but they unnecessarily and radically change a system that could be mended with minor modifications administered as needed over time.